It is quite often that we ask ourselves questions such as “How do I protect myself and my family from any unforeseen circumstances/emergencies?”, “How do I make my wealth grow?” etc. What if we told you that you can achieve both your objectives under a single plan called a Unit Link Insurance Plan or a ULIP?
A ULIP is a market-linked product that provides you with the benefits of both insurance as well as an investment. What’s more? Your investments in the form of premiums can be claimed for tax deduction under Section 80C of the Income Tax Act, 1961! Thereby, providing you with more money in your hand. There are a lot of ULIP plans online that you can avail/opt for if you’re looking for one.
In this article, we will explain everything you need to know about ULIPs.
What is a ULIP & How does it work?
As mentioned above, your ULIP investment is divided into two parts: 1) a life insurance risk cover on premium paid and 2) an investment in various market instruments such as stocks, bonds or funds (equity, debt or hybrid). ULIPs are essentially long-term plans that can help you fulfill your long-term goals. These goals can span across retirement planning, child’s education or other important events/objectives that you wish to achieve. Please note that all ULIP investments have a lock-in period of 5 years. Finserv MARKETS offers a Goal Assure ULIP that can assist you in achieving your life goals.
Type of ULIPs
There are essentially two broad types of ULIP plans available in the market:
- Type 1 ULIP:
In this type of ULIP, the death benefit or life insurance risk cover is equal to the higher of the sum assured or fund value. For example, Mr. A invests in type 1 ULIP for a sum assured of INR 6,00,000 at an annual premium of INR 60,000. In this case, if Mr. A dies in the initial years of the policy period then, Mr. A gets INR 6,00,000. Now, in case, the fund’s value was higher than the sum assured at the time of death, Mr. A gets the fund value amount as death benefit.
- Type II ULIP:
In the same example above, in a type II ULIP, Mr. A would receive the sum assured as well as the fund value at the time of an unfortunate incident. This is also why Type II ULIP plans have a higher premium than Type I ULIPs.
There are some Basic Charges associated with ULIPs that get deducted from your premium and the left-over amount then gets invested in stocks, bonds or funds etc. These charges include:
- Fund Management Charges
- Premium Allocation Charges
- Policy Administration Charges
- Mortality Charges
- Surrender Charges
Benefits of ULIPs
Listed below are the various ULIP benefits :
With ULIPs, you get the benefit of a life cover along with an opportunity to grow your wealth over a long-term. It comes with the security that in case of an untimely death of a taxpayer, the family would stand to benefit.
Income Tax Benefit:
ULIP policies holding life cover of 10X of annualized premium are eligible for tax exemption under 80c of the Income Tax Act, 1961. Moreover, your returns on investment in ULIPs are also tax free!
Finance Long-Term Goals:
ULIP is a great investment option if you have are buying a house, fulfilling a retirement dream and more. Net returns from a ULIP are usually more. This is true even if you decide to exit the plan after the standard five-year lock-in period. However, it’s always advisable to keep your ULIP going for a longer period of time to get the maximum benefits.
Flexibility of Portfolio Switch:
With a ULIP, you also get the option to switch your portfolio between an equity fund and a debt fund and vice versa. However, this would be based on your knowledge about market performance and risk factors as well.
Things to Consider as an Investor
Below are some of the important factors one should consider before investing in ULIPs:
Personal Financial Goals:
If your plan is wealth creation and to save money for long term goals then ULIP is one of the best options available.
Compare ULIP Offerings:
Once you’ve set your goals and chosen a type of ULIP that will help you with that, your next step should be to compare the different ULIP offers available in the market.
Be rational and understand the risk factor that comes with ULIPs. This will give you a better understanding of the product and keep you prepared.
Now that you know everything about ULIPs, it is recommended that you invest in one today!
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